Must U.S. Courts Defer to a Judicial Decision Annulling a Foreign Arbitral Award? Not If It Violates U.S. Public Policy, Says the Second Circuit

5min

It is generally accepted that an arbitral award may be annulled (or vacated) only by those courts in the place where the arbitration took place. So, for example, U.S. courts would have exclusive jurisdiction to annul an arbitral award that is issued in the United States. But what happens when an award is annulled by the local courts—may another jurisdiction still enforce it?

According to the U.S. Court of Appeals for the Second Circuit, the answer is yes. In Corporación Mexicana de Mantenimiento Integral, S. De R.L. de C.V. v. Pemex-Exploración y Producción, the Second Circuit found that confirming an award is proper when giving effect to the nullification would run counter to U.S. public policy and would be "repugnant to fundamental notions of what is decent and just" in this country. The decisions of the Second Circuit are often the bellwether for the recognition of foreign arbitral awards in the United States.

COMMISA-Pemex will encourage those with vacated arbitral awards to seek enforcement in the federal courts in New York. New York courts are within the Second Circuit, and New York is where many entities maintain assets. What is less clear, however, is when U.S. courts will find annulment of an award to be clearly repugnant to fundamental notions of what is decent and just. Future decisions will likely help articulate this standard.

Enforcement of Foreign Arbitral Awards in the United States

The U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) and the Inter-American Convention on International Commercial Arbitration (known as the Panama Convention) govern the recognition and enforcement of foreign and "nondomestic" arbitral awards. There are 156 parties to the New York Convention and 19 parties to the Panama Convention, which is open only to members of the Organization of American States.

These treaties require the recognition and enforcement of arbitral awards issued in another jurisdiction unless one of a few narrow exceptions applies. Both treaties say that a court "may" refuse recognition of an award that has been annulled or vacated in the jurisdiction where the award was issued; neither requires refusal.

Enforcement of Foreign Judicial Decisions in the United States

There are no treaties similar to the New York Convention that require a court in the United States to enforce a decision of a foreign court. (Although the United States signed the Hague Convention on Choice of Court Agreements, the Convention has not been ratified.) Many U.S. states have statutes governing the recognition of foreign money judgments. Enforcing nonmonetary judgments, however, is a matter of comity. Based on common-law principles of international comity, foreign nonmonetary judgments may be refused enforcement if they violate U.S. public policy.

The COMMISA-Pemex Case

The COMMISA-Pemex dispute was brought by COMMISA, the Mexican subsidiary of a U.S. company, against Pemex, a Mexican state-owned company, for breach of contract. In 1997, COMMISA and Pemex contracted for COMMISA to build oil platforms in the Gulf of Mexico. The contract required that any dispute be submitted to arbitration in accordance with the rules of the International Chamber of Commerce (ICC).

Difficulties arose between the parties, in part because Pemex insisted that the platforms be fully constructed before being put into place in the Gulf of Mexico. COMMISA considered this requirement impractical, given the weight of the completed platforms. These and other logistical and cost issues reached a climax in March 2004, when Pemex alleged COMMISA had failed to meet contractual milestones and had abandoned the project. Pemex seized the platforms, which were 94 percent complete, and ejected COMMISA from the work sites. COMMISA then filed a demand for arbitration with the ICC. The arbitration took place in Mexico. Ultimately, COMMISA won an award in 2009 for approximately USD 300 million.

While the arbitration was pending, Mexico issued a number of legislative changes. Among other things, it vested exclusive jurisdiction for disputes related to public contracts in a particular court; it shortened the statute of limitations for breach of such contracts from 10 years to 45 days; and it revoked the right to arbitrate public-contract disputes.

When Pemex lost the arbitration, COMMISA petitioned the U.S. District Court for the Southern District of New York for confirmation of the award under the Panama Convention, which the district court granted. Pemex appealed the district court's judgment and simultaneously attacked the arbitral award in the Mexican courts. Pemex argued before the Mexican courts that the legislative changes implemented during the pendency of the arbitration required that the award be annulled under Mexican law. The Mexican courts agreed.

At Pemex's request, the Second Circuit sent the case back to the district court to consider the effect of the annulment. The district court adhered to its prior ruling. The Second Circuit affirmed, holding that the district court had properly exercised its discretion in confirming the award.

As the Second Circuit noted, the case required it to reconcile "a district court's discretion to confirm an arbitral award, and the comity owed to a foreign court's ruling on the validity of an arbitral award rendered in that country." Among other things, the court held that the Panama Convention, like the New York Convention, permits—but does not require—U.S. courts to refuse to recognize a vacated award. The court also held that principles of comity require U.S. courts to defer to a judicial decision annulling a foreign award unless it would be contrary to U.S. public policy. According to the Second Circuit, it was against U.S. public policy to defer to the Mexican courts' annulment, because doing so would disregard a contractual waiver of sovereign immunity (the agreement to arbitrate), deprive COMMISA of any forum for its claims, result in an uncompensated taking, and retroactively apply legislation.

Important Implications

Given New York's position as a global financial center, the Second Circuit often hears—and typically has the last word on—cases concerning international commerce, including the recognition of foreign arbitral awards and judicial decisions. Although the circumstances of COMMISA-Pemex are unique and fact-specific, the decision opens the door in certain circumstances for those seeking to recognize arbitral awards in the United States that are vacated by foreign courts. Such efforts will likely lead future U.S. courts to articulate in greater detail what types of activities violate U.S. public policy.